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Risk Aversion, Liquidity, and Endogenous Short Horizons

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Author Info
Holden, Craig W
Subrahmanyam, Avanidhar
Abstract

We analyze a competitive model in which different information signals get reflected in value at different points in time. If investors are sufficiently risk averse, we obtain an equilibrium in which all investors focus exclusively on the short term. In addition, we show that increasing the variance of informationless trading increases market depth but causes a greater proportion of investors to focus on the short-term signal, which decreases the informativeness of prices about the long run. Finally, we also explore parameter spaces under which long-term informed agents wish to voluntarily disclose their information. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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Publisher Info
Article provided by Oxford University Press for Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 9 (1996)
Issue (Month): 2 ()
Pages: 691-722
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:oup:rfinst:v:9:y:1996:i:2:p:691-722

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  1. Casamatta, Catherine & Pouget, Sébastien, 2009. "Fund Managers' Contracts and Short-Termism," IDEI Working Papers 553, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
  2. Alexander Gumbel, 1999. "Trading on Short-Term Information," OFRC Working Papers Series 1999fe10, Oxford Financial Research Centre. [Downloadable!]
  3. Craig Holden & Avanidhar Subrahmanyam, 1998. "New Events, Information Acquisition, and Serial Correlation," University of California at Los Angeles, Anderson Graduate School of Management 1115, Anderson Graduate School of Management, UCLA. [Downloadable!]
  4. Alexander Gümbel, 2000. "Myopic Traders, Efficiency and Taxation," OFRC Working Papers Series 2000fe05, Oxford Financial Research Centre. [Downloadable!]
  5. Matthew Spiegel, 1997. "Closed-End Fund Discounts in a Rational Agent Economy," Finance 9712002, EconWPA. [Downloadable!]
  6. Marc-Andreas Muendler, 2005. "Rational Information Choice in Financial Market Equilibrium," University of California at San Diego, Economics Working Paper Series 2005-04, Department of Economics, UC San Diego. [Downloadable!]
    Other versions:
  7. SHerrill Shaffer, 2008. "Strategic Risk Aversion," CAMA Working Papers 2008-25, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
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